COMMON STOCK

Common stock represents basic ownership of a corporation, whether a small
privately owned company with a few shares held by a single owner and
perhaps a few associates, or a giant publicly traded corporation with
hundreds of thousands of stockholders. Common stock is by far the largest
class of securities held and traded by general investors; when someone
speaks of "owning stocks," usually common stock is implicit.

The holders of common stock rank behind all creditors (bondholders,
banks,
and other lenders) as well as any holders of
preferred stock
in their claims on the current income of the company, including any
dividend distributions, and, in case of liquidation, on whatever assets
remain. In essence, these senior holders must be paid their due before the
common stockholders are entitled to anything. By the same token, once
these senior claims are met, the entire income and increase in the value
of the company accrues for the benefit of the common stockholders.

Common stock is divided into shares, each representing a proportionate
part of the total common stock ownership. The corporate charter or bylaws
fixes the number of shares that are authorized for issue. The
issued shares are those that have actually been sold to stockholders or
otherwise distributed in return for value—for acquisitions, options
or grants to employees, stock dividends to stockholders, etc. Outstanding
shares are those currently in the hands of stockholders. The difference
between the number of issued and outstanding shares is usually accounted
for by treasury stock—shares reacquired by the company through
market purchases or special solicitations and held in the company's
treasury. This stock is then available for reissue in employee stock
plans, acquisitions, conversion of convertible
bonds
or preferred stocks, or other corporate operations. While in the
treasury, such stock is not entitled to dividends, has no voting rights,
and is not counted in the computation of earnings per share. For practical
purposes, when looking at a company's capitalization, what counts
is the number of outstanding shares.

Sometimes the common stock is divided into separate classes. Usually one
class has greater (or even exclusive) voting power, often with the aim of
keeping control within a founding family or the management circle. This
practice increases the management's autonomy, but critics claim
that it also diminishes the fiscal restraint that comes with being fully
accountable to external shareholders. Some companies may grant their
nonvoting common stockholders the right to receive larger dividends. Since
the 1980s, the issue of dualor multi-class common stock has also been used
as a preemptive measure against hostile takeovers.

Stocks
have a par value (or, if the company chooses to issue no-par stock, a
stated value). In modern times, this is strictly an
accounting
formality (accountants need a dollar amount at which each share is
entered on the company's books) and has no relation whatever to the
actual value of the stock.

Since the common stock, as a class, has claim to all of a company's
resources after senior claims are met, common stock equity (the value
allocated to the stockholdings on the company's books) consists of
the total assets shown on the company's
balance sheet,
less all liabilities. It is essentially the company's net worth.
This equity may be shown in the financial statement as the sum of the par
value of the stock, capital surplus (the amount paid for newly issued
stock above that nominal par value), and retained earnings (sometimes
called earned surplus). The total stockholders' equity is divided
by the number of shares outstanding to arrive at the book value per
share—the theoretical value of the net assets behind each share on
the company's books.

While book value can be one useful guide in assessing a company's
shares, it is by no means a reliable measure of a stock's
investment worth, and may bear little relation to the stock's price
on the stock market. The assets used in the book value calculations may be
worth more or less in the company's operations than the value on
the books (e.g., a property may be worth far more than its ancient
acquisition price or a plant may be obsolete), and in any case it's
the company's future profitability that is most important in
establishing investor value. And besides, investors (including expert
financial analysts) may be wrong in their expectations of the future. From
a practical standpoint, a stock at any point in time is worth what a buyer
in the marketplace is willing to pay for it.

Because by nature common shares carry all the risks as well as potential
rewards of ownership, they tend to fluctuate considerably more than other
investment instruments such as good-quality bonds and preferred stocks.
However, consistent with the notion of rewarding risk with higher returns,
a large number of investment studies show that over the long run common
stocks as a whole offer a higher investment return than other investment
categories, and have demonstrated the greatest ability to outpace
inflation
over the decades. Thus, most experts agree that any long-term investment
plan (especially for retirement) should rely heavily, but not exclusively,
on common stocks.